INDONESIA ENERGY OUTLOOK & STATISTICS 2006

EXECUTIVE SUMMARY

BACKGROUND
This executive summary is excerpt of Indonesia Energy of Outlook & Statistics edition 2006. The energy outlook was a result of the simulation of a model called Indonesia Energy Outlook by System Dynamic (INOSYD) developed by Pengkajian Energi Universitas Indonesia (PEUI) since 1997. The INOSYD model is written in a dynamic simulation software called POWERSIM. The framework of INOSYD consists of 3 basic sub-models: (1) Energy system sub-model, (2) Macro-economic submodel, and (3) Environmental sub-model. The GDP projection uses the assumption of 6% growth per year for the base case; while the population projection uses an assumption of 1.20% growth per year. For the projection until 2025, INOSYD uses data mostly from years 1990 through 2005.

INTRODUCTION
There is a considerable increase of the final energy consumption in Indonesia from year 2005 to a projected year of 2025. The total final energy consumption in industrial sector increases nearly 2.9 times from the 2005’s consumption of 249 million BOE, in residential sector 2.0 times from 88 million BOE, in commercial sector 2.9 times from 21 million BOE and in transportation sector 2.9 times from 208 million BOE. In 2005 industrial sector was the largest final energy consumption (44%) followed by transportation sector (37%). In 2025 industrial and transportation sectors are projected to remain the largest and the second largest final energy consumer, which respectively consumes 47% and 35%. All those figures do not consider biomass energy consumed in residential sector especially in rural areas which is deemed as non-commercial energy. By excluding biomass energy consumed by residential sector, in terms of primary energy consumption, Indonesia took up 832 million BOE of energy in 2005 which increases to 2.95 times in 2025. From 2005 through 2025, crude oil shares most of the primary energy consumed, though its share declines from 52.16% in 2005 to 37.56%. Since 2004, Indonesia has become a net oil importer because the domestic consumption started to surpass the domestic oil production. The deficit of the oil balance is even worst in 2025 which reaches -549 million BOE. This deficit has to be fulfilled by oil importation and the dependency of Indonesia on world oil price is projected even higher. The contribution of coal and natural gas to the primary energy consumption will increase from 17.78% and 26.56% respectively in 2005 to 24.42% and 34.10% respectively in 2025. It is projected that the domestic production of natural gas and coal from present till 2025 can fulfill these consumptions. Primary energy consumption per capita is steadily increasing from 0.65 TOE/capita to 1.38 TOE/capita (a double increase) even though the projected population increases from 220 millions in 2005 to 280 million in 2025. As consequences, the CO2 emission per capita also increases and is projected to double from the present emission of 2.13 ton CO2/capita. On the other hands, the primary energy consumption per GDP is slightly decreasing from 73.53 TOE/million US $ in 2005 to 62.43 TOE/million US $ in 2025 which accords with the slight decrease of CO2 emission/GDP from 241.20 ton/million US $ in 2005 to 191.3 ton/million US $ in 2025. In total magnitude, the emission of CO2, NOx, and SOx in 2025 will reach 1,200 million ton, 4.4 million ton, and 3.7 million ton, respectively compared to 450 million ton, 1.7 million ton, and 2 million ton in 2005, respectively. This means that roughly there will be increase of emissions produced by Indonesia 2.7 times from years 2005 to 2025.

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EXECUTIVE SUMMARY

OIL AND GAS
In 2005, Indonesia’s oil reserves are around 8.63 billion barrels, with proven reserves of 4.19 billion barrels corresponding to 0.4% of world proven reserves, and potential reserves of 4.44 billion barrels. Indonesian crude oil production including condensate is about 342 million barrels in 2005. This production gradually declined 33% from year of 2000 due to ageing oil fields and lack of investment for exploration and development. Since Indonesia’s installed capacity of the refineries is unchanged as opposed to the increasing domestic fuel consumption, the import value of petroleum products has augmented significantly. The import figure of petroleum products in 2005 was about 158 million barrels corresponding to US$ 10.3 billion. For comparison, the import volume in 2000 was only 87 million barrels or US$ 2.9 billion. In the same time Indonesia export refined products was about US$ 2.05 billion. Domestic petroleum fuels consumption increased to 354 million barrels in 2005 from 293 million barrels in 2000, which contributed 62% of total final energy consumption. Most of domestic fuel is consumed by transportation (30%), industry (44%) and household (16%) sectors. Indonesia’s natural gas reserves in 2005 are 185.8 trillion cubic feet (tcf). This corresponds to almost 2.7 % of the world proven natural gas reserves. Most of natural gas reserves are located offshore/remote which far from demand centers.

Indonesia’s natural gas gross production decreased slightly to 2.98 tcf in 2005 from 3.15 tcf in 2003. The current Indonesia’s LNG and LPG production are 23.7 million metric tons and 1.8 million metric tons per year, respectively. Most of the natural gas produced (about 60 %) was processed into liquefied natural gas (LNG) for export purposes. The rest is consumed by domestic sectors, mainly industrial and electricity sectors. The projections for oil and gas sectors up to 2025 are as follows. For reserves-to-production ratio (R/P) of 10 years, the total domestic demand of crude oil will reach 923 million BOE at 2025, which is 2.1 times the consumption in 2005. In 2012 the crude production is expected to equalize the crude import which is projected to fulfill 61% of the oil domestic consumption. This percentage is projected to increase to 80% or 739 million BOE in 2025.
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Figure 1 Crude Oil Balance

As to balance of natural gas, it is interesting to note that in 2009 the domestic natural gas consumption is projected to reach the value of natural gas exports (~300 million BOE). Within the period of 2005-2025, domestic natural gas consumption will increase attaining 838 million BOE in 2025 or about 12,000 mmscfd with average growth rate per year almost 6.8% driven mainly by the growth in industrial and electricity sectors.

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Figure 2 Natural Gas Balance

In twenty years, the total primary energy consumption originating from oil and gas will increase significantly almost 2.1 times for oil and 3.8 times for gas to reach 923 million BOE and 838 million BOE in 2025 compared to the 2005’s figures. The rate of energy consumption (oil and gas) is much higher than the discovery rate of new oil and gas reserves. In 2025 the total final energy consumption is projected to be dominated by oil fuels and gas (66.2%) compared to about 75% in 2005 (excluded biomass). In the near future, the roles of oil and gas sector are still important in securing national energy supply. Based on these outlooks, in the upstream of oil and gas, Indonesia faces the declining oil and gas production and needs to boost the production. The government should set a competitive fiscal term to attract investors for development of mature and frontier areas including marginal and depleting fields. The government should reform to enhance good practice of government agencies in interacting with investors. In the downstream oil and gas sector, the Indonesian faces a number of obstacles mainly by limited infrastructures of energy, subsidies and disincentives in the pricing of domestic petroleum products and natural gas. The current domestic petroleum fuels and gas pricing policy discourages players to build new refinery and storages and gas producers to boost additional gas supply for the domestic market. Under the business as usual approach, current condition of oil and gas will be maintained rising problems of lack of infrastructure, serious domestic supply shortage, and increasing dependency of petroleum fuels import at a high cost. Finally, a good understanding of the various interests of the oil and gas industry and a well-defined and -articulated political commitment are essential for structural reforming. Realistic pricing policy is important to ensure better utilization of oil and gas where their value added to the economy is the highest. Better investment climate is also vital to encourage the investors to produce more oil and gas and to realize new infrastructures. As a nation we should be responsible to improve national productivities for each calory of oil and gas used. It would be unethical to use oil and gas to fullfil our current life style in energy comsumption or to pay our debt without concerning their sustainability for future generation. The national energy policy needs to be more integrative by considering all types of energy resources and more sustainable energy approach.

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EXECUTIVE SUMMARY

COAL
Around 95% of Indonesia’s coal is at present produced from surface mining operation. Indonesia has significant coal resources of 38.8 billion million tons of identified coal deposits, of which 11.5 billion tons are classified as measured resources and 27.3 billion tons as indicated, inferred and hypothetical resources, with 5.4 billion tons classified as commercially exploitable reserves. Indonesia’s coal production increased sharply from 77 million tons in 2000 to 150 million tons in 2005. Indonesia’s domestic demand for coal is currently small relative to its production. Of the 2005 coal production figure, about 40 million tons was consumed domestically, mainly for power generation of about 25 million tons and the rest for cement production. The remaining 110 million tons which represented about 73% of total production was exported. The share of coal in Indonesia’s primary energy supply rose from 15 percent in 2000 to 18.5 percent in 2005, primarily due to the development of coalfired power plants. Coal is preferable as an energy source due to its relatively low price compared with oil and natural gas.

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Figure 3 Coal Balance

INOSYD projections for coal sector for time horizon up to 2025 are as follows. In 2025, coal production will reach 346 million tons per year, of which a half would be consumed domestically. In 2025, the share of coal to total primary energy supply will reach about 30 % and up to 60 % for electricity generation. Electricity generation is expected to continuously dominate domestic coal consumption in 2025. Coal would provide a significant contribution in replacing Indonesia’s dependence on oil and natural gas, particularly, for power generation and industrial sectors. However, in securing a smooth transition to greater coal utilizations, Indonesia would require strategic policy, considerations and clear measures to meet the challenges ahead. Some of crucial policies to be considered are as follows: Securing domestic coal supply by coal national stock and integrated coal production planning at national level. Increasing exploration activities to improve coal deposit status and coal infrastructure development. Creating conducive climate for new investments (direct foreign and domestic) in coal mining activities, by introduction of comprehensive mining law, clear regulations and policies that promote the clean and rational development of coal sector. Greater usage of locally available fuels for regional development such as by mine-mouth power-plant fueled by low rank coals. Application of coal up-grading technology for greater use of low rank coals as well as to increase its economic values. Promoting cleaner coal technology research and development activities as well as underground mine activities. Pengkajian Energi Universitas Indonesia

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EXECUTIVE SUMMARY

Promoting good coal mining and handling practices through out coal life cycles including post mining site reclamation.

RENEWABLE ENERGY
The total potential of geothermal energy is 19,658 MWe and only 807 MWe (4.10% of the total potential) has been utilized to generate electricity. The total hydropower potential is estimated to be 75,000 MW and approximately 50% of it is exploitable. About 60 percent of these resources are located in Kalimantan and Papua. The micro-hydro potential in Indonesia is estimated 201.7 MW. The micro-hydro power generators (PLTM) benefited for remote areas (20.85 MW or 10.33 % of the total
2 potential). The average daily solar radiation in most places is quite intense (approximately 4 kWh/m ). The total installed capacity

of solar energy in Indonesia, especially photovoltaic, is about 6.5 MW. The electricity generated has been used to drive water pumps, vaccine refrigerators in hospitals, or lighting (solar home system). The approximate wind power potential in Indonesia is about 9,286 MW and only 0.5 MW of which has been used for generating power. Potentials of biomass originating from plantation waste rice, corn, cassava, wood, baggase, coconut and palm wastes) spread across Indonesia. The total potential is estimated to amount to 49.80 MW. Biogas energy potential from droppings of cows, buffaloes, and pigs can be found in all provinces with different quantities. Its total potential is estimated to accounts for 684.83 MW. The potential of peat in Indonesia is estimated to amount to 97.93 X 10
12

MJ.

INOSYD projections for renewable energy sector up to 2025 are as follows. In 2025, total renewable consumption (including biomass) will reach 505 million BOE or almost double the 2005’s consumption figure. In comparison to other types of energy (petroleum fuels, coals and natural gas), in industrial sector, the contribution of renewable energy to final energy consumption from years 2004 to 2025 is quite small, which is 4.65% of the total energy consumed by this sector in 2005 and reducing to 1.94% in 2025), though its consumption quantity slightly increases from 12.17 in 2005 to 14.48 million BOE in 2025. In commercial sector, the contribution of renewable energy also reduces from 7.26% of the total sector’s energy consumption in 2004 to 2.70% in 2025 though its consumption nearly doubles from 1.67 million BOE in 2005 to 2.94 million BOE in 2025. In residential sector, the contribution slightly reduces from 72.29% in 2005 to 69.24% in 2025 with its consumption quantity increasing from 229.15 million BOE to 408.95 million BOE. A contrary situation occurs in transportation sector where the contribution of renewable energy slightly increases from zero in 2005 to 8.84% in 2025 thanks to the introduction of biofuels in this sector. As a final energy for electricity generation, the contribution of renewable energy increases in terms of quantity from 15.16 million BOE in 2005 to 78.62 million BOE in 2025. In terms of proportion in energy mix for electricity generation, its contribution also increases from 9.07% in 2005 to 13.05% in 2025. As a primary energy, the contribution of renewable energy to the whole energy mix increases from 258.16 million BOE in 2005 to 504.99 million BOE in 2025 and its proportion in the whole energy mix 28.32% in 2005 to 21.62% in 2025. The future of Indonesia’s renewable energy usage in the next decade will depend on government policy on this energy sector. Some crucial policies for renewable energy sector to be considered are as follows: Reform on regulation framework to boost the utilization of renewable energy in households, industry and electricity generation. Increasing the use of small-scale electricity power generation utilising local renewable energy sources. Creating clear policy on investment and funding schemes, such as (i) wider roles of private sector, BUMN, BUMD, and cooperatives in the development of renewable energy; (ii) incentive policy making; (iii) creative funding mechanism. Policy in human resource developments through education and training, and knowledge and technology transfer. Increasing infrastructure and supporting industries related to the development of renewable energy sector. Accelerating adjustment of the price of fossil fuel energy towards its economic price.

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EXECUTIVE SUMMARY

ELECTRICITY
In 2006 the average growth of electricity demand in Indonesia is about 7.5% per year. The growth doesn’t show a normal growth rate due to two main reasons. Firstly, the government subsidizes the electricity, and secondly, the growth figure actually only considers the electric companies’ capability to fill the electricity demands from the consumers. In fact, there is still huge number of consumers in waiting list for the electricity provision.
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Figure 4 Electricity Consumption by Sector

The average elasticity for electricity is around 1.5 showing that the major part of electricity usage in Indonesia is still not productive and efficient. This means an increase of 1 percent in economic growth requires 1.5 percent growth in electricity consumption. In the period of 2025, electricity demand would reach 440.5 GWh corresponding to 270 million BOE, with 83% fueled by coal and natural gas. Contribution of renewable energy is only 13.1%. The highest electricity consumption are projected to be by industrial sector which reaches 55% and household sector 29.2 %. The electricity policies in the near future should consider: • • • Initiave to tackle the existing electricity crisis in several regions. Insentive and rational electricity price to attract new investments and developments of new power generation plants and electricity transmissions. For well-established areas the provision of electricity can be undertaken efficiently through competition and transparency in a healthy business climate with regulations that provide the same treatment to all business players and provide benefits fairly and evenly to consumers. • Based on partnership program in energy audit for buiding and industrial sectors, energy saving up to 25 percent is possible. Thus, effective energy conservation measures for building and industries are recommended as part of demand side management. • • Reducing the dependency to oil fuels and increasing the role of natural gas, coal and renewable energy sources for power generation. The greatest utilization of domestically-produced goods and services that are competitive and yield added value so as to result in the development of the national electricity industry;

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EXECUTIVE SUMMARY

ENERGY INVESTMENT
Regarding oil and gas infrastructures in 2025, Indonesia needs to construct new petroleum refineries with capacity 2 times to current refinery capacity or 2.2 million b/d capacities with an assumption of no importation of petroleum fuels. This requires an accumulative investment of US$ 35 billion. Additional storage facilities require new investment around US$ 10.5 billion. For natural gas infrastructure, the estimated total investment is US$ 10 billion including gas refineries and pipeline gas. All the estimated investments are calculated based only on capital expenditures. For coal sector, new development of coal infrastructures including double tracking of Sumatra’s rail line and railways infrastructures in Kalimantan require an estimated accumulative investment of about US$1,500 million. In 2025, electricity demand would reach 440.5 GWh, which corresponds to 270 million BOE. In comparison to the current total installed capacity of power generation, in 2025, around 70,000 MW new power plants are needed to support the economic and social growths. The cost for adding the power plant infrastructure until 2025 is projected to be about US$ 55,000 Million. Main problems of Indonesian electricity sector are electricity shortages in some regions; high oil price rendering huge government subsidy; limited spare capacity of electricity infrastructures, i.e. the power generation and transmission network capacities. One factor that may cause lack of new investment in this sector is the fact that electricity tariff applied is not based on its economic price. In general, due to unreliability in electricity transmission and distribution, some potential customers provide their own self-generation plants.

ENERGY CONSERVATION
The first oil crisis in 1973 has triggered Japan and European countries to launch energy conservation initiatives. On the supply side, the diversification of energy sources has been pushed forward by switching to alternative energies such as natural gas, nuclear power or renewable energy. On the demand side, on the other hands, the industrial sector is playing a central role in terms of energy conservation.
rd In the meantime, concern on global warming has encouraged developed nations at the 3 Session of the Conference of

the Parties in Kyoto 1997 to cut their Green House Gas (GHG) emissions. This agreement also known as Kyoto protocol boosted further effort of energy conservation. This is not surprising since more than 90% of GHG consists of carbon dioxide and approximately 90% of carbon dioxide is emitted from combustion of fossil fuels. That means nearly 80 percent of GHG emissions originates from energy use. On the basis of this reasoning, improvement in energy efficiency by energy conservation program can solve energy and environmental problems simultaneously. As part of the Kyoto protocol, Japan, for example, pledged that a 6% reduction in greenhouse gas emission from the 1990 level is to be achieved in terms of the average annual value in the 2008-2012. As a result, the Long-term Energy SupplyDemand Outlook was reviewed and revised aiming to attain the GHG emission reduction target committed to Kyoto protocol . In the case of business as usual (BAU), energy consumption and the emission of greenhouse gas in 2010 would increase respectively to 456million kL of crude oil equivalent and to 347 million carbon tons as CO2. To attain Japan’s target of the Kyoto protocol commitment, it would need not only to maintain the energy consumption in 2010 at 400 million kL, which means reducing it by 56 million kL through energy conservation, but also to introduce more active energy supply measures with lower CO2 emissions, including new and non-fossil fuel energy technologies. As mentioned above, since the first oil crisis in 1973, many industrialized nations have launched energy conservation initiatives. In Japan, the Law concerning the Rational Use of Energy (Energy Conservation Law) was adopted in 1979, thus energy consumption efficiency standards for vehicles, air conditioners, and electric refrigerators were set for the first time. Some Asian countries also adopted energy conservation law, for example South Korea and Thailand.

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EXECUTIVE SUMMARY

The increase of oil price recently and in years to come is expected to affect many countries to once again consider wide range policy to promote energy conservation activities. Compare to industrialized countries, many ASEAN countries including Indonesia consume less energy per capita, but have higher energy intensity. In general, energy conservation potential of industry, transportation, household and commercial sectors in Indonesia is quite high. Table 1 shows that energy efficiency improvement of 15 to 30 % is estimated to be achievable in various sectors in Indonesia. Table 1 Energy Conservation Potential in Indonesia Sector Industry Transportation Household and Commercial
Source : DGEEU, 2006

Total Consumption (Thousand BOE) 194.35 169.73 134.63

Energy Conservation Potential (Thousand BOE) 29.15 -58.31 42.43 13.46 – 40.39 (%) 15 - 30 25 10 – 30

In Indonesia the first regulation regarding the energy conservation program was introduced in 1982, as a response to high oil price at that time. The related regulations for energy conservation can be summarized as follows. • • • Presidential Instruction No. 9/1982 concerning the Reporting System of Energy Use in Government-office Buildings, Presidential Decree No. 43/1991 concerning the Energy Conservation, Minister of Mines and Energy Decree acting as BAKOREN Chief No. 100.K/148/M.PE/ 1995 concerning National Master Plan of Energy Conservation, • Minister of Energy and Mineral Resources Decree No. 2/2004 concerning the Policy on Renewable Energy Development and Energy Conservation (Green Energy), • • • Minister of Energy and Mineral Resources Decree No. 0983.K/16/MEM /2004 concerning National Energy Policy. Presidential Instruction No. 10 / 2005 concerning Efficient Use of Energy. Ministerial Regulation No. 0031/2005 on Energy Ministerial Regulation No. 0031/2005 on Energy Conservation Procedure • Presidential Decree No.5/2006 on National National Energy Policy. To encourage the implementation of energy conservation efforts in buildings, several National Standards (SNI) have been introduced, for example: SNI 03-6389-2000 : Energy Conservation on Building Envelope SNI 03-6390-2000 : Energy Conservation on Air Conditioning System for Building SNI 03-6196-2000 : Energy Audit Procedure for Building SNI 03-6197-2000 : Energy Conservation on Lighting System for Building.

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EXECUTIVE SUMMARY

Estimation of the effects of energy conservation in Indonesia’s primary energy demand is presented in National Energy Blueprint 2005-2025. Without energy conservation effort Indonesia’s primary energy demand in 2025 is expected to reach fivefold of the 2005 level. A nation wide policy and strong commitment to implement energy conservation in all sectors is pre-requisite in reducing primary energy demand to threefold as encouraged under energy conservation scenario. As stated earlier, energy conservation measures have clear objectives, (i) to reduce energy demand and (ii) to improve national competitiveness, and (iii) to meet greenhouse gas emission target. The effectiveness of energy conservation measures requires strategic policy, considerations and clear measures such as: Introduction of new law concerning rational energy use, the so called energy conservation law. This law should secure the existence of an energy conservation fund as incentive to speed-up the implementation of various energy conservation projects already studied via energy audit activities. Creating energy manager scheme to improve energy efficiency in large to medium enterprises in building and industrial sectors. Promoting energy efficient appliances as part of energy demand side management. Improvement of the spread and quality of training program on energy conservation at various levels. Introduction of stringent energy performance criteria and standard especially for building, industries, and transportation sectors.

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